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SEPA Update: Slow Progress

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Proponents of the Single Euro Payments Area are considering stringent measures to encourage companies to hop on board.

As eurozone countries busy themselves implementing liquidity measures designed to calm market fears about sovereign debt problems in member states, it is clear to anyone watching the drama unfold in Europe that national interests are still dominant, despite the fact that member states share a single currency. Although the transition to the single currency in January 1999 went off with barely a hitch, it now appears that the euro has hit a rocky patch—a situation few perhaps envisaged, where the systemic risk implications of sovereign debt problems in one country begin spilling over into others.

But it not just the euro that is in trouble. In the wake of the single currency's introduction the European Commission and the European Central Bank (ECB) painted a vision of a more united Europe, which shared not only a currency but also more-cost-efficient pan-European payment mechanisms, effectively treating what is today considered a cross-border payment as a domestic payment. European banks responded to this challenge by forming the European Payments Council (EPC), which was charged with drafting the new pan-European payment schemes that would help realize the Single Euro Payments Area (SEPA) vision.

In January 2008, SEPA credit transfers, based on the EPC schemes, went live and after some delays SEPA direct debits were finally launched in November 2009. But adoption of the new payment instruments has been slow, with SEPA credit transfers accounting for just over 9% of all transfers in the eurozone and SEPA direct debits accounting for less than 1% of the total. So is SEPA on a road to nowhere, as one study recently suggested? Well, it depends who you talk to, but it is certainly reasonable to conclude that SEPA has come to a fork in the road, and no one is quite sure what direction it will go off in.

The EC has come to the realization that voluntary SEPA migration is not working, and many organizations involved in the project, including the European parliament, banks that have invested heavily in the EPC's SEPA schemes and companies that have yet to migrate to the new payment standards, are calling for the Commission to mandate an end date for full migration to SEPA. In its seventh progress report on SEPA, published last October, the ECB said "much has been achieved in implementing SEPA," with more than 4,400 banks adopting SEPA credit transfers and over 3,000 banks opting for direct debits. However, for SEPA to be a success, it said, further legislative action was needed. "In this respect, a mandatory timeline for the migration to SEPA payment instruments will significantly accelerate the pace of transition, enabling SEPA to be completed, preferably, by the end of 2012 for credit transfers and by the end of 2013 for direct debits," the report stated.

Daniela Russo, director general for payments and market infrastructures at the ECB, says an end date alone is not enough. She explains, "We need to convince users [SEPA] is advantageous. Banks did not give adequate information about SEPA's advantages." Those advantages include lower costs for users, reduction of execution times for payments from five days to two days and companies' not having to maintain multiple bank accounts in order to make payments in different European countries.

Gerard Hartsink, the chairman of the EPC, says banks cannot make SEPA work on their own. "If the buy side is not accepting of SEPA, it will never fly," he points out. SEPA implementation in each country is managed by national SEPA committees. But in some countries, Hartsink says, the public sector is not working with buyside and sellside firms, so it is unclear what their view is on SEPA.

Yet Giorgio De Rita, managing director of DigitPA, the Italian public administration, claims most public administrations do not believe payments reform is critical, so they are loath to lead SEPA adoption—particularly as doing so will require substantial IT changes on their part. Hartsink, however, is encouraged by the formation of the SEPA Council, which is made up of buyside and sellside firms as well as public sector representatives. "My expectation is that SEPA Council will stimulate the upgrade of [implementation] teams at the national level," he says.

Others are less optimistic. Alessandro Rivera, director general of financial and banking system and legal affairs at Italy's finance ministry, believes SEPA migration could take up to 30 years. "We could reach it within 15 to 20 years, but I don't believe this is tolerable," he stated at the SEPA conference in Milan. Full migration to SEPA within 30 years may sound a bit far-fetched, but it is abundantly clear that European policymakers and the banks underestimated what it would take to get businesses to abandon existing domestic payment schemes.

The recent financial crisis also helped delay SEPA migration. "The crisis has led to a de-prioritization of the SEPA project," says Ruth Wandhöfer, head of payments strategy and market policy, EMEA, at Citi Global Transaction Services. "At the moment we're in a difficult dynamic where the financial crisis led to fragmentation back to national rules, while [SEPA] is really about integrating one single market in Europe." Gilbert Lichter, CEO of financial market infrastructure provider EBA Clearing, describes the financial crisis as lost years for the SEPA migration. "We should not lose sight of the difficulties that came up during this process to SEPA," he said.

One of those difficulties was a curveball the EC threw halfway through the SEPA implementation project when it made it clear that the EPC schemes should not be the only game in town. "It would be convenient to just cut and paste the EPC schemes," said EC representative Michael Thom, "but that does not address concerns on the user side about giving a private body [the EPC] a monopoly for retail payments. Will that stop future innovation? And what about governance?"

The Commission is under increasing pressure from end-user groups to ensure SEPA is a market-led, not a bank-led, project. Given these criticisms, the EC now appears to favor an "essential requirements" approach, which means that instead of mandating full migration to the EPC schemes, it will mandate only essential or technical requirements for SEPA. At SWIFT's annual customer conference in Amsterdam last October, Hartsink of the EPC said he was shocked to hear the Commission may allow for alternative domestic legacy payment systems, "because from the start the message was, migrate to the same [SEPA] schemes and technical standards." He later expanded on this, saying that leaving the door open for existing national payment schemes to become SEPA-compliant would cause fragmentation and punish early movers.

Despite the plethora of challenges that remain for SEPA, Lichter of EBA Clearing, which provides infrastructure for clearing low-value payments in the eurozone, is optimistic about SEPA's prospects. "Corporates were not coming forward with appetite [for SEPA credit transfers], but this is now happening," he said. "Only impatient people are pessimistic about SEPA."